Sunday, February 19, 2017

Five Speculative Selling Solutions


A long-term reader of this blog suggested that I write about selling rather than buying investments. In everything I do I want to measure how close I get to my goals. Out of this measurement need, I require a time period. While it is of future betting interest to have the fastest moving horse or other investment at the end  of a race, the payoff is the best performer for the fixed length of the race. The genesis of the TIMESPAN L Portfolios® was to focus on achieving the ability to meet disbursement goals on a timely basis. 

This requirement is in some conflict with my instinctive ways to invest. Warren Buffett's favorite investment time period to invest is "forever." Mine may be even longer! (Over time some of my long-term investments have tripled to quintupled or more, beyond my exaggerated dreams.) Nevertheless, in focusing on most investors' needs to occasionally sell, I am commenting on five such events. But once again to judge whether selling is propitious or not, some measure of time is needed. Yes, to some extent the seller can celebrate the freeing of cash from investments in other assets. However, in the aftermath of a sale one is often asked whether the timing of the transaction was good. Thus to some extent a successful sale is measured as to how well the exit price compares with future prices. In this light the success of a sale is speculative in terms of comparisons.

The purpose of producing this post is to focus on the various thought processes that lead to successfully evolving solutions for five events when selling occurs.

1.  The Avoid Switch

Rarely people, their companies, their politics, and their investments  behave exactly as we conceived when we entered the transaction. It is difficult to find an investment that does not in some way disappoint, either by its own actions or factors beyond its control. There are times when the results are so good in the eyes of the market that the current price is way ahead of a reasonable long-term projection. Thus, at current prices there is considerable price risk. At times the risk appears to be too large and while an investor has not lost faith in the company, the investor may believe that the current price won't be repeated for an extended length of time. Most of the time the simple solution is to dispose of the holding. At times instead of selling out completely, reducing the size of the position makes more sense if there is not a screaming bargain available.

There are other occasions that selling may make sense. Several times I have been a holder of a security that I thought that I reasonably understood when either the company or the market did something that I did not understand. For example years ago a major conglomerate that I followed as an analyst switched from an under-reporting of earnings to including dealing earnings within operating earnings. Thus from my analyst's perspective, the company went from having a hidden kitty available to cover operating earnings shortfalls in some of its cyclical businesses to reporting every possible element of earnings. In other cases some companies made what I considered to be vanity acquisitions or questionable product pricing policies.  In these cases I felt I did not properly understand  these investments and exited them from my long-term holdings. 

In most cases if an investor is not comfortable in his or her understanding of an investment they would be wise to avoid owning it.

2.  The Bargain Switch

Sir John Templeton, my former data and consulting client, often phrased his sales in terms of purchasing better bargains. While occasionally what is better is only a lower valuation. To me these can prove to be "value traps." Normally things are cheaper because they should be - in terms of quality of product or management. However, we may have entered a period when bargain hunting can be productive.   

The rise of exchange traded funds and other passive devices based on industry sector codes (technology) or market capitalization (Large Cap growth) has led to an unusual level of correlation of stock prices within these data sets. With expected changes in currencies, taxes, import/export mixes, etc., I suspect that there will be greater dispersion in stock prices within many data sets. If I am correct, the number of active mutual funds outperforming the various indices should rise which will attract some of the trading money out of passive/ETF vehicles into either selected individual securities or smartly active mutual funds. As the differences in valuations becomes greater I would expect that there will be opportunities to be long or short individual securities that could favor more bargain switching.

3.  To Trim or Not?

As much as we would like to, we don't control the markets or the spending needs for our money. Thus over time we will have our investment wealth at a different balance than our beginning level. In many ways it is much easier to deal with a smaller amount of money than the beginning portfolio. In that case one should definitely trim the cash. The odds are that the decline in general market prices of stocks will eventually be reversed.

Many of those who have seen their income and wealth rise have already found that their gains do not lessen their problems but rather change them as well as their outlook. Once one has a portfolio, even if is limited to the number of holdings, it is an important part as to how one views the future.  For most individual and institutional investors who have not consciously or subconsciously adapted the timespan philosophy,  they will be dealing with a single portfolio that is probably focused on too short a time frame; e.g., one quarter, one year, or a single market cycle. Under these conditions the fear of near term losses becomes paramount. Thus, in a perceived expensive market the natural tendency is to reduce risk exposure. Perhaps the first technique should be to reduce or eliminate small positions on the basis that if they are still small they are not likely to be favored in the short-term.

Those who take a longer than current period view have history on their side for US equities and quite possibly for equities in general. The other historical trend worth recognizing is that great wealth comes from extreme concentration of effort, intelligence, and investment which suggests that concentrated portfolios in knowledgeable investors’ or managers’ accounts can produce great results.

After due consideration, trimming or completely eliminating positions could be the correct decision even if investments under other managers are doing well.  It might be helpful to not let the tax man become the portfolio manager.

The shorter term oriented accounts will tend to be much more market price sensitive than the longer term accounts who are more focused on building absolute capital. I suspect the shorter term accounts have higher portfolio turnover and on average pay more in taxes over time than the longer term accounts.

4.  The Familiarization Trade 

Most of those who read this blog have a substantial portion of their wealth in tradeable securities. Some do not and receive the major portion of their wealth in a concrete package of stock options, private company interests, convertible securities, and various types of trusts. For many, these instruments are difficult to understand even with professional help that may not be specifically knowledgeable on these particulars. As these managers are unfamiliar to the new recipient, there is some substantial fear of making a mistake in the process of converting their new illiquid wealth to easily tradeable securities and/or cash. My suggestion (regardless as to the perceived value of the new investment) is to take the smallest portion of the investment and convert through the many steps to cash. This will equip the new owner with an understanding of how the process of unwinding the concentrated wealth package can be converted, which should help with some understanding of the benefits of not doing anything more than evaluating the next and future steps. As is often the case, selling something can be a valuable learning experience.

5.  Quitting 

Recently those who have robust national or global political views in light of the strong to very strong stock markets are pondering whether they should quit the game and sell all their exposed equity positions. In terms of recorded history there have been a very limited number of times this has been a correct decision. Those instances have been very rare. But no one can be certain that at any given point stock price declines of more than half are not possible.

My own views are based on the beliefs that we have entered a different market phase. For at least the last ten years and perhaps longer we have been a world of single digits in terms of almost all main statistics of market prices, earnings, revenues, demographics, etc. I believe that starting with last summer we are accelerating into a double digit world, both up and down. In this new world sound investment principles will continue to work, but for some time the numerical bands won't. May this lead to an eventual market, if not economic collapse? Yes, it might, but not necessarily so. Rather than focusing on only the historic ratios, like Liz Ann Sonders of Charles Schwab, I am focusing on sentiment and currently the general lack of wild enthusiasm which is positive in my judgment that there is more time in this expansion.

As a contrarian and as a manager of portfolios owning mutual funds, I am often premature in my market judgments and actions. I am not yet ready to hit the quit button and retreat to cash, which is losing value regularly. Perhaps this time I will accept the downside volatility as the sign to exit.

Even if we do have a top and a subsequent fall, I hope I will not forget my responsibilities to future generations and totally "go to ground" in a foxhole. 


There are times and conditions when selling is wise. However, these decisions should be made carefully without too much attention to the current and a reasonable review of the longer term future. The sellers historically have the burden of history against them, but they can win.

Question for all time:

Have you successfully sold an important part of your wealth and re-entered the market? Was it at a lower or higher price?   

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A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Sunday, February 12, 2017

Can You Blame Your Investment Model?


Every moment of every trading day we are confronted with the question, “Do we buy, or sell, or just rearrange?” While one does not know exactly when the next major investment peak or bottom will be, almost all of my time should be spent on how to function between these extremes. Nonetheless, since the actual future turning points are not known, I probably should not expend a great deal of intellectual energy or emotion focusing on the search. If I have this discipline it puts me in a minority of those who make statements about the market. Perhaps my investment accounts and I are benefiting from this redirection of my emotion and mindset. Nevertheless, most of us operate in a relative performance world, my performance will be judged as how it compares with how others perform. Thus, I need to grasp how other investors, particularly institutional investors, view the market. As Hylton Phillips-Page, our firm’s VP of fund selection and I have frequent discussions with both mutual fund portfolio managers and some of their investors, I am struck that most of these chats revolve around  “the market” in general, or the price of a particular stock is expressed as a ratio of the current price to some other variable. Most of the time the managers believe they are buying and owning at some attractive discount to the larger variable. In other words they have a model which is generating a distinct benefit for their investors.

Experience as The Model

What I have learned from the Neuro-economics professors at Caltech, (where I serve as a senior trustee) is that when most are forced to make a judgment, the brain reviews its experiences. If the experiences generated pleasure it was good and thus similar situations will also be judged as good. Having been essentially a student of investing not only through my life but also of others over history where I can get some historical insight, I see a particular pattern emerging.

Most of the time prices move gradually. Often at the final run up or collapse one can divide professional investors/traders in general by age categories. Whatever driving enthusiasm is largely supported by the young, who view the then current offering as new, different, and wonderful will be the opposite of their older brethren that distrust the surge as it looks suspiciously like past problem-producing situations. Thus the more experienced players don’t participate until the parabolic price move that comes just before the turning point. Some of the more experienced players can’t stand missing out these “goodies” and need to defend themselves against the arrogance of the newly rich. (The same pattern occurs on accelerating declines to a bottom when the twin views that the world is coming to an end and/or prices fail to reflect the survival realities.)

I have noticed throughout my career that many formerly successful investors miss out on “the new thing” because the load of their experiences reminds them of past failures from over-excited enthusiasm. One of the advantages of investing through medium to large mutual fund management groups is that they often have bright analysts and portfolio managers, some with a great deal of successful experience and often, younger ones that perceive greater futures. In assembling a portfolio of mutual funds we choose some of each.

Which Past is Relevant?

To choose as the statistical base for a predictive model we have recorded human history, derived history from scientific sources in addition to yesterday’s news. I suspect we could do far worse than being guided by The Bible. It tells of seven fat years followed by seven learn years, currency manipulation by rulers, collectible and uncollectible taxes, famines, wars, disease, population growth and immigration, etc. While no one has proven that these lessons are not still applicable, we have chosen to shift to statistical measures. Most often we rely on government produced statistics. Since I have met some of the tabulators and understand how they gather data,  I have always had a jaundiced eye on their product. That is even before today’s fully expected (by me) article in the New York Times about groups of government employees developing “slow walking” strategies showing their opposition to the new Administration.

We measure our deficit, that will undoubtedly grow, as a % of our GDP which is an output measure not a wealth measure. As a matter of fact the government’s main view of the population is derived largely from aggregating tax returns. I ask how many of our readers attempt to show the largest income and the least expenses?! Further, often as people get older their wealth grows and in retirement it is their wealth not their income that motivates them.

Another source of questionable value is reported earnings of public companies. When evaluating a possible acquisition of a public company the excess assets and the operating business are separately evaluated. (I sold a data business’s operating assets, not the company and its balance sheet.)

One of the more popular valuation metrics is averaging the last ten year’s reported earnings. This is in contrast to my first lesson from Professor David Dodd, of Graham & Dodd, which was to restructure both the balance sheet and income statement to put them on a comparable basis with other companies that could have been investment candidates. Many models are based on industrial sectors as defined by either the government or a major credit rater. Over the years both IBM and Apple* among others have been shifted from sector to sector. I suggest that if one wishes to be long or short either of these securities, it will not be because of different statistical ratios with whatever industrial sector someone places them.
*Held personally.

We are in a New World

I am well aware the typical reason given to buy a security that is historically over-priced is, according to the salesperson, “This time is different.” To some extent that could be right today in that we have entered essentially a new phase. In the past the leading countries were growing in population and wealth. Often they were clearly technological leaders. In the United States, China, Japan, and developed Europe, the size of the work force is declining relative to their total populations and all are experiencing growth in seniors. (This may inhibit the new Administration’s ability to grow the US labor participation.)

Interesting that some have looked askance of my announcing our firm’s smallest new commitment to a fund that invests in the Middle East and Africa, because of favorable demographics, savings rates, and progress in their educational institutions. Based on current trends it is only a matter of time that Africa will house one quarter of the world’s population.

We are now living in a world where farming and manufacturing are becoming smaller relative to the growth of the service sector. (Service sector includes financial services which is experiencing growth from traditional sources but also new entrants and technologies. Unschooled farmers in Africa are daily monitoring the price of their commodities on cell phones. The fastest growth in the financial sector is in mobile finance and banking.)

The world is facing the integration of currencies, taxes, trade and military policies. One should expect that in the future we will understand the difference between schooling and useful education.

Do I Have a Model?

The simple answer is no. But I have a process to benefit and protect my investment responsibilities. First, I attempt to get our accounts to utilize the TIMEPSAN L Portfolio® approach which addresses the importance of getting the future right. The shorter term portfolios live in the world of the present whereas the longer term portfolios are more future oriented. Since we use funds from a number of the leading investment organizations each has their own views of the future, they will change over time.

My model essentially leans on the investment lessons that have been learned over the millennia and watching what smart commercial and investment professionals do with their long-term money.

Question of the Week (or perhaps the year): What Model Drives Your Investments?  

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A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

Sunday, February 5, 2017

Winning Investors’ Super Bowl

1.  Too Much Correlation/Pity the Shorts Near-Term
2.  Dynasties Need to Win Everyday
3.  Defense and Discipline Over Speed
4.  The Long Ball Could be the Ultimate Winner

Special Note: I have some investment credentials and years of experience with winners and losers which I share with you and my investment advisory clients.  Over the same period I have been following both sports and politics as an amateur, and do not claim any expertise.


The commonality of statistics, emotions, and luck are present in viewing investments, politics, and sports. In the US they converge on the Super Bowl. The commonality is not due to the statistical side which will be quoted ad nauseam, but the emotions which will guide future actions and lessons learned and not learned. Being one who has been formally trained as a security analyst I start with the numerical relationships but with a bit of suspicion that some of these pairs are coincidental and not causal. The one advantage the long-term investor has is that long-term relations normally hold until broken by some event. As distinct from sports (and to somewhat lesser frequency, politics) pure random luck plays a lesser role than investing for the long-term.

In our discussion I  look at various inputs with the same timespan approach I used in constructing the TIMESPAN L Portfolios®.

The Immediate

Often many Super Bowl fans feel the ultimate result of the game becomes clear after the first series of plays. In a similar way, if one uses the first five investment trading weeks of 2017, there is one overriding statistical impression. That is, most securities are being traded within a tight correlation. We are in an era of increased interest in selling short either through individual securities or hedge funds/exchange traded funds. Investment theory holds that one sells securities short to make money or as a hedge against an otherwise long portfolio. As of February 2nd,  out of 120  SEC registered taxable fund categories only 9 showed losses on average for the year-to-date. Most of these losses were small and only 2 were worse than -2%, led by the -4.74% decline in the Dedicated Short Bias category. With the exception of a +17.38% gain for the average Precious Metals Equity fund, none of the other equity funds were up over 10%. A further manifestation of this condition is that recently the CBOE VIX ratio traded at its ten year low. Some may call this a Goldilocks market. I call it a statistical aberration driven by political judgments. The  market bulls are extending the campaign speeches to actual pieces of government regulation or passed legislation without recognizing that the Administration is in what the Navy calls a shakedown cruise to get to know how the ship and crew will act under trial conditions. The lack of new constructive specific criticism by the opposition party is giving the Administration a free pass. Under these conditions one can understand the lack of interest in shorting securities. Instead of pitying the short sellers, we should keep an eye on them, for at some point there will be more dispersion in prices and selling short will return to its traditional role as a hedging device.

Just Before the Start

Today's Super Bowl started with a formal coin toss as to which team will receive first. This formal ceremony was supervised by former President George H.W. Bush and Barbara Bush. The Bushes are a remarkable political family which has ties to three US Presidents, two governors, one senator and is a political factor in Texas, Florida, Connecticut, Missouri and Maine.

In many ways Barbara Bush was the quintessential First Lady who was respected throughout the country. Even with this proud tradition of national service, Jeb Bush was not prepared for the new style of social media campaign that produced the current resident of the White House.

Even in politics, credentials and streaks don't always win under changed conditions. On paper the New England Patriots should have won this year’s Super Bowl. To some extent the contest highlighted their defensive skills and precision passing versus the Falcon's speed and height.

From an investment point of view, the winner will be the one that has the right combination of both defense and offense. Without skills in both, a leader can be worn down to becoming a loser. The winner most likely will demonstrate some successful new skills not shown before. In managing your money you will need to use intelligent defensive and offensive plays and from time to time show some new ways of doing things.

After the Game

One of the responsibilities that we accept in managing money for clients is to appropriately invest for long periods, often beyond our lifetime. The owners of today's Super Bowl teams will have generated the capital that he or she has wisely invested in the past for use today. In the same light I look for long-term investments that can make a huge difference. I am very conscious that the US Defense Department through DARPA funded the creation of the internet as a way research could be transmitted to various institutes and universities.  Little did anyone then conceive how the internet would drive our recent election and is changing the delivery system to consumers worldwide. I am beginning to wonder whether Artificial Intelligence (AI) could have the same impact as the internet. Just as the internet was created to assist the Defense Department, the development of AI is of critical military importance as China appears to be gaining on the US lead with the help of returning Chinese scientists and executives. From a military standpoint, AI technology could be used to assist our guided missiles to avoid defenses and aid in targeting decisions. The implication to me is that conceptually the same or similar technology can be used both in the commercial and investment worlds. Avoiding some strong defenses could make today's winner and  also tomorrow's successful investor.
The Recap

In reality, we saw three great football games, the first was the dominance of the young Atlanta Falcons into the third quarter, the last half of the third quarter through the fourth quarter where the Patriots acted like their American forefathers recovering from adversity, and the first overtime in Super Bowl history that displayed the mastery of the training on the details of winning. Many other teams would have "phoned in" their plays being so far behind. The Patriots never lost their confidence and their controls.

From an investors standpoint this great game was similar to the investor's year of 2016. The first six weeks were painful, it was not until immediately after the BREXIT vote did US interest rates start to rise as the demand for money improved; the final seven weeks of the year saw enthusiasm for the future drive stock prices higher. The investors who came out of the year with their investment discipline intact and were able to take advantage of the opportunities offered were the winners.

Statistically there is only one drawback to the Patriots win. The Falcons can trace their historical lineage to the original conference which was the senior member of the merger that created the modern NFL. For some unexplained reason when teams representing the older conference wins, the stock market usually goes up and when they don't, the market goes down. There is no logic to the result but it has worked out this way for fifty years, 80% of the time. I would not change any investment strategies because of this, but be prepared for the chance of a down market, but maybe you have a Tom Brady as your investment quarterback who in the end produces a winning result.

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Copyright © 2008 - 2017
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.